Business Economics - Assignment Example

Business Economics Exam II 6 out of 10 questions Question # 3 – Based on the experience of U.S. economic policy, it is observed that whenever Congress decides to increase the rate of government spending, gross private investment spending tends to decrease. a) Please explain why. As government becomes more empowered by spending more, the private sector seems to become less so. Gross private investment spending may decrease with an increasing rate of government spending more likely because “government spend­ing displaces private-sector activity” (Mitchell). This happens when more money is allocated for the government’s use and implementation rather than for the individuals’ use and implementation. Historically, as Congress has decided to fund international warfare, such as in Iraq, less money went toward educating school children and taking care of the individual homeless individuals in our very own country. The government seems to win. The U.S. citizens seem to lose out when they find themselves without a voice. Mitchell, Daniel J. The Impact of Government Spending on Economic Growth. The Heritage Foundation Backgrounder. No. 1831 (18 March 2005). 5 Sept. 2007 . b) What should the Fed do to reverse the decrease in gross private investment spending? To reverse the decrease in gross private investment spending, the Fed should allocate more funding toward individual programs and families; it could also offer a lower interest rate. Because the higher the interest rates and the less empowered the U.S. citizens seem, the “more muted” (Philpott 15) becomes the desire of the individual families to act as productive shoppers and consumers. When life seems expensive, the less becomes the desire to invest in one’s self. Thus, the Fed could, in addition to lowering interest rates, offer other forms of incentives by spending less itself and letting the individual consumers spend, buy, invest, and shop in order to increase the welfare and well-being of family. Instead of making individuals work more hours, the Fed could find more positive ways to increase levels of desire to work. Thus, “productivity” (Philpott 15) and the satisfaction of working increase in relation to one another. And, it becomes important for the Fed, to reverse the decrease in gross private investment spending, to proactively limit “the burden of government” (Mitchell) on the people of the United States. Mitchell, Daniel J. The Impact of Government Spending on Economic Growth. The Heritage Foundation Backgrounder. No. 1831 (18 March 2005). 5 Sept. 2007 . Philpott, John. “This year may be nice but it won’t be easy.” Personnel Today Jan. 2004: 15. c) Thus, what would be the resulting effects of an increase in government spending accompanied by a policy push for an increase in gross private investment spending? Once the individual U.S. citizens become empowered through the increase of gross private investment spending, the resulting effects would appear in the form of national pride and “optimism” (Mitchell). Give a sense of control and decision making to the individual citizens and another effect would be a movement toward “prosperity” (Mitchell). Individuals would feel a sense of enrichment, not only in their pocketbooks and wallets, but also in their internal emotional states. Also, an increase in gross private investment spending could lead to more individuals finding themselves gainfully employed as “extra jobs … [are] created” (Philpott 15). Mitchell, Daniel J. The Impact of Government Spending on Economic Growth. The Heritage Foundation Backgrounder. No. 1831 (18 March 2005). 5 Sept. 2007 . Philpott, John. “This year may be nice but it won’t be easy.” Personnel Today Jan. 2004: 15. Question #4 – This question pertains to the tools of monetary policy. a) Why does the Fed use open-market operations as its principal tool of monetary management, rather than changes in the required reserve ratios, or changes in the discount rate? As its principal tool of monetary management, the Fed uses open-market operations rather than changes in the required reserve ratios, or changes in the discount rate, because of all these options, the open-market operations have been described as “the most flexible” (Open Market Operations). Open-market operations have also been considered to be the simplest of the three and the “most effective” (Obringer). It is a form of stable business delegation where the source of decision making relies on a single group of people. And more money is spread throughout the public consumer sectors. On the other hand, required reserve ratios may not be the principal tool of monetary management most likely because any time the required reserve ratios undergo modification or transformation, the currency of the nation could face a negative impact in the form of destruction on the part of the Fed (Schenk). And the changes in the discount rate, fluctuating between a low and high interest rate, prevent the Fed from constantly borrowing money at a reasonable cost (Schenk). Obringer, Lee A. “How the Fed Works.” Howstuffworks.com. 5 Sept. 2007 . “Open Market Operations.” Federal Reserve Bank of New York. 5 Sept. 2007 . Schenk, Robert. “The Federal Reserve and Monetary Policy.” CyberEconomics. 5 Sept. 2007 . b) What are the differences in the effects that each technique would have on individual banks, on the commercial banking system as a whole, and on the money supply? Through open-market operations, the Fed helps individual banks “reinvest” (Open Market Operations) their monetary supplies through the inexpensive process of giving, taking, and lending. Through open-market operations, the Fed helps the commercial banking as a whole to “offset or support permanent, seasonal or cyclical shifts in the supply of reserve balances” (Open Market Operations) by having a stronghold on the amount of money that has been set aside in savings. And, through open-market operations, the Fed helps keep the money supply plentiful and available for both regular usage and emergencies. The required reserve ratios have somewhat negative effects on banks, on the commercial banking system as a whole, and on the money supply. For the most part, the required reserve ratio directly relates to “the amount of net transactions accounts at the depository institution” (Reserve Requirements), or a bank. This means that the banks must reserve or keep within reach a certain amount of money on hand at all times. The type of money that the commercial banking system must maintain at all times is in the form of “cash” (Reserve Requirements). Thus, the monetary supply that can be lent, borrowed, or transacted among the banks and the private sector is limited. As far as the discount rate goes, the effects on the banks, on the commercial banking system as a whole, and on the money supply may also have negative effects. Although Steverman describes this “discount window” (4) of opportunity as a positive step on the part of the Fed, the question remains how long this would last. Since the discount rate has a great impact on how much money is and can be borrowed, it could be argued that once the rate rises, the amount of money borrowed decreases. The length of the discount rate could be impacted by such factors as the “deteriorating conditions in the housing market” (Steverman 4) or in any such market where money is transacted among the private sector and the banking institutions. And, for the most part, it seems, the discount rate is never lowered on a long-term basis because conditions in various markets have a way of varying season to season. “Open Market Operations.” Federal Reserve Bank of New York. 5 Sept. 2007 . “Reserve Requirements.” The Federal Reserve Board. 5 Sept. 2007 . Steverman, Ben. “Did Countrywide Get a Hand from the Fed?” Business Week Online (2007): 4. Question #6 – Estimates of state and local taxes in the City of Baltimore indicate that a family with an income of the $30,000 pays $3,300; one with $60,000 income pays $8,400; while one with $100,000 pays $12,000. a) Is the Baltimore tax structure progressive, or regressive, or what? (Hint: Compare the ratios of taxes to income. A regressive tax means that a poor person pays proportionally more taxes than a rich person does.) Whereas in a progressive tax structure, a “higher proportion of income is taken in tax as income rises” (OECD), in a regressive tax structure, “25 percent on the first $20,000 of income, and 10 percent on all additional income” (Slemrod) is paid by an individual. Thus, at looking at the state and local taxes of City of Baltimore, it seems obvious that the families of varying incomes are paying taxes through a progressive tax structure. Slemrod, Joel B. “Progressive Taxes.” The Concise Encyclopedia of Economics. 2002. The Library of Economics and Liberty. 5 Sept. 2007. . OECD.org. 21 Sept. 2001. Trends in Tax Burdens and Tax Structures. 5 Sept. 2007. . b) Considering the kind of taxes generally used by state and local governments, is this what you would have expected? Explain why one encounters such a tax structure at the local level. (Note: These taxes are not federal income taxes.) Yes, the progressive tax structure is what is mostly expected. One encounters such a tax structure at the local level because this has come to be the case ever since Oliver Wendell Homes stated that “taxes are the price we pay for civilized society” (Slemrod). The more one earns, the more one pays back the government in taxes. And, in return, using the tax money, the government renders a particular service through what has been described as “the benefit principle” (Slemrod). The poorer households may receive more benefits than those of the wealthier sectors, considering that this system is based on relativity, proportion and progression (i.e. earned income versus taxes taken out). The government may consider that those in the poorer sectors of society could benefit from a service like healthcare more than the rich because, one may assume, the poorer may value that service more; just as they may value each extra penny in their pocketbooks. Slemrod, Joel B. “Progressive Taxes.” The Concise Encyclopedia of Economics. 2002. The Library of Economics and Liberty. 5 Sept. 2007. . Question #7 – A study of New York slum areas by the U.S. Bureau of the Census found that there were 5,600 men counted as unemployed. The Census also counted an additional 7,000 men who were a) working only part time, b) working full time for less than $500 a week, or c) neither working nor looking for work because of discouragement with their chances in the labor market. a) Why were these extra 7,000 men NOT part of the unemployment count? Explain. These extra 7,000 men were not part of the unemployment count because while working part time, while working full time for less than $500 a week, or while neither working looking for work because of discouragement with their changes in the labor market, they were not part of the group that desired to be gainfully employed “but do not have jobs” (Deardorff’s). In other words, these extra 7,000 men would either have had to have no work hours at all during the week. Not having a job also implies a willingness to be looking for work or a sense of encouragement or desire to seek out work. But, these extra men, having a sense of discouragement did not become part of the unemployment count. Deardorff's Glossary of International Economics. 2001. 6 Sept. 2007 Read More